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1 This is the English translation of the Monetary Policy , originally published in Greek (in March 2012). 1.2 DEVELOPMENTS AND PROSPECTS IN THE REAL ESTATE MARKET The Greek real estate market continues to be characterised by excessive supply, coupled with a considerable stock of unsold properties and very low demand, without any signs of recovery, as medium-term expectations remain negative. 1 Despite excessive supply in the real estate market, house prices have displayed relative resilience. 2 On the basis of data collected from credit institutions, apartment prices fell by 3.7% in 2009, 4.7% in 2010 and 5.1% in 2011 (-5.4%, -4.9%, -4.3% and -5.9% in the first, second, third and fourth quarters of 2011, respectively; see Table ΙΙΙ.6). Throughout the crisis, this fall in prices has been stronger for old apartments (over 5 years old: -4.8%, -5.0% and -5.6% in 2009, 2010 and 2011, respectively) than for new apartments (up to 5 years old: -2.0%, -4.2% and -4.4% in 2009, 2010 and 2011, respectively), which reflects the relatively stronger resilience of the prices of newly-built apartments that are normally sold by the constructors. 1 Reduced demand in the Greek real estate market reflects household expectations for further decline in house prices and, mainly, increased uncertainty about employment and future incomes. It is also associated with the overall prospect of addressing the fiscal and structural problems of the Greek economy. It is estimated that the more cautious and selective attitude of banks when granting new loans has also contributed to the decline in demand. 2 It is estimated that the relative resilience of house prices in the current crisis was supported by the high percentage of self-occupancy (over 80%), the large number of very small (family) businesses involved in house construction which, before the current crisis, had gained substantial profits that enabled them to steer away from bank loans, as well as the low frequency of real estate resale. Price resilience is also associated with increased construction costs that complicates the replacement of the existing stock of houses, the high cost of transactions (transfer tax, notarial and lawyer s fees etc.), the traditionally high trust of households in real estates, as well as the social perceptions of Greek households, which do not see a residential property as an investment asset but, on the contrary, they transfer it from one generation to the next (parental donation or bequest from parents to children). Monetary Policy (March 2012, Chapter III, Section 1.2) 1

2 It is highly likely that the Greek residential market has not shown signs of a major overvaluation, while downward trends in prices will probably continue in the coming months, with a limited risk of abrupt change in prices. During the crisis, households purchasing interests shifted towards smaller, older and, mainly, more affordable properties. Moreover, the percentage of cash transactions and the share of cash in total financing for real estate purchase have increased. In the commercial real estate market (offices, retail stores, industrial buildings, warehouses, etc.), there has been reduced demand in the past few years, combined with a shift towards more economically-priced business premises, increased supply and falling prices, tight credit and relative cautiousness in developing new investment projects, increased number of unoccupied retail stores and offices, significant fall in rental prices and renegotiation of lease contracts. Prospects for recovery in the real estate market depend, inter alia, on the improvement of business and household expectations, better bank financing terms, as well as better prospects for the recovery of the Greek economy and, consequently, reduced uncertainty. 1.2.Α POTENTIAL EFFECTS OF THE PUBLIC PROPERTY UTILIZATION ON THE REAL ESTATE MARKET The effort to utilize public property is faced with the long-standing problems of the Greek administration. Despite repeated reminders of the hidden potentials of public property that could contribute to economic growth and boost public revenues, any efforts to develop it is characterised by relative irresolution. This is directly associated both with the recession in the Greek real estate market in recent years and the significant problems that stand in the way of the effort to develop public property, including the deficient recording of public property, the fragmented system of management bodies, the lack of a complete and accurate cadastre, pending matters Monetary Policy (March 2012, Chapter III, Section 1.2) 2

3 relating to the redetermination of land uses and the delineation of seashores and beaches, continuous violation of land use and long-standing litigations relating to a substantial part of public property, as well as multiple commitments and restrictions (e.g. protection of the environment or local architectural identity, archaeological restrictions, legislation on bequests). 3 The need of the government to immediately resolve legal and technical issues relating to urban planning and permits for the development of public property is also underlined in the new Memorandum of Economic and Financial Policies. 4 In any event, however, it is estimated that the dynamic and rational utilization and development of public property can ensure constantly and on a long-term basis revenues for the Greek State, as well as additional development benefits for local communities and economies. However, real estate market experts estimate that if a large number of public properties are put up for sale in the current conjuncture of marked recession and reduced investor interest (because of the uncertainty and limited liquidity of the market), the recovery of the market will become even more difficult and the Greek State will not obtain commensurate revenues and benefits. On the contrary, it is estimated that the institutions of concession and long-term lease contracts are very effective tools for the development of public property and will activate direct foreign and other private investment, thereby supporting economic recovery and improving market sentiment and public revenues. 1.2.Β POTENTIAL EFFECTS OF THE RECENT TAX MEASURES The significant increase in the tax burden on real estate in the past three years (in the context of the effort to boost public revenues) is estimated to have intensified recession in the real estate market. 5 Apart from this burden, repeated announcements and postponements of additional measures prolong uncertainty about the tax regime on 3 See Monetary Policy Interim Report 2010, Special Feature 3. 4 In the context of this Memorandum, the Hellenic Public Asset Development Fund (HRADF) will register about 3,000 properties by end-june 2012, in order to develop them. 5 The most important recent tax burdens include the special levy on real estates paid through electricity bills, the significant reduction in the tax-free limits for real estate tax levy and the increase in VAT in the newly-built property purchases and land granting. Monetary Policy (March 2012, Chapter III, Section 1.2) 3

4 real estates (increase in objective values, the imposition of VAT on commercial property of individuals etc.) and make the future recovery of the market even more difficult. For instance, objective values (that determine the value of real estate properties for taxation purposes) have not increased, although this measure has been announced many times in the past. In any event, objective values are expected to be adjusted to market prices by June 2012 (new Memorandum of Economic and Financial Policies). If this will be the case, there will be significant adjustments to the taxable value of real estate properties (especially in areas where the difference between objective and market value is high), which will lead to increases in many taxes, thereby accentuating the heightened uncertainty and recession in the Greek real estate market. 6 Any such adjustment must, in any event, be coupled with rational real estate taxation, towards both reducing taxes on transfers 7 and abolishing various charges, as well as establishing or maintaining a very small number of uniform taxes that would replace the multitude of existing ones (e.g. a single tax on transactions and a single tax on real estate ownership). 6 Indeed, objective values are used to calculate the level of various taxes, charges, contributions and fines relating to real estates, such as taxes on transfers, acquisitive prescription, exchange, distribution, inheritance, parental donations and gifts, the recently imposed special levy on real estate for residential or commercial use, the real estate tax, the real estate charge (TAP) imposed by local authorities etc. The objective value is also associated with the cost of property transfer contracts (notarial fees, lawyer s fees, registration fees etc.) and the charges and contributions paid on building permits, while it is also used to determine presumed revenues from real estate and presumed minimum income derived from self-owned or leased houses. 7 It should be noted that taxes on property transfers and parental donations in Greece are very high compared with the other EU countries, while it is estimated that their reduction will increase the very low frequency of transactions in the real estate market. Monetary Policy (March 2012, Chapter III, Section 1.2) 4

5 Table III.6 Summary table of key short-term indicators for the real estate market Average annual percentage changes Indicators Indices of prices of dwellings (BoG) and rents (ELSTAT) 1.1 Indices of apartments prices by age and geographical area (New series) a. All apartments (Greece) a1. By age a. New (up to 5 years old) b. Old (5 years old and above) a2. By geographical area: Total a. Athens b. Thesaloniki c. Other cities d. Other areas a2.1. By geographical area: New (up to 5 years old) a. Athens b. Thesaloniki c. Other cities d. Other areas a2.2. By geographical area: Old (5 years old and above) a. Athens b. Thesaloniki c. Other cities d. Other areas Indices of prices of dwellings (Historical Series) a. Urban areas a1. Athens a2. Other urban areas (3 months) 1.3 Price index of rents Price-to-rent ratio (2007=100) Indices of residential property transactions 2.1 Indices of residential property transactions with MFI intermediation (BoG) 4 a. Number of transactions b. Volume of transactions (in square metres) c. Value of transactions Indices of contracts of real estate transactions with represantation of lawyer: Athens (DSA) a. Number of contracts b. Value of contracts Indices of deed of real estate transactions 5 (ELSTAT) a. Greece, total b. Athens Number of real estate transactions 5 (Hellenic National Cadastre) a. Greece, total b. Athens Number of real estate transfers 5 (Hellenic National Cadastre) a. Greece, total b. Athens Number of residential property transfers recorded at the Athens land registry Sources: BoG: Bank of Greece, ELSTAT: Hellenic Statistical Authority, DSA: Athens Bar Association, Ktimatologio SA: Hellenic Cadastre, Athens Land Registry. 1 Data collected by the branches of BoG, mainly from real estate agencies. 2 The rate of change in the first two months of 2012 was -0.4% y-o-y. 3 In absolute terms. 4 The indices of residential property transactions are based on appraisal reports by banks engineers regarding the value and qualitative characteristics of the residential properties und loan agreements. It cannot be excluded that part of such appraisals are not connected with transactions in residential property, but concern a renegotiation of existing loans, registrat mortgage to back non-housing loans, debt transfers from one bank to another, etc. 5 Including all real estate categories of residential and commercial properties (dwellings, general stores, offices, building plots, rural plots, etc.) Monetary Policy (March 2012, Chapter III, Section 1.2) 5

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